Monday, November 16, 2015

Fred Thompson checks in again with this piece (I should really start calling this the "Fred Thompson Economics Blog). Thanks Fred for keeping this blog alive!

Recently Chuck Sheketoff of the Oregon Center for Public
Policy addressed a barrage of questions
to the opponents of raising the Oregon minimum wage to $13.50 and, then, $15.
Like a good attorney he asked only questions he knew and liked the answers to.
Some of the questions he didn’t ask are:

1. Who do minimum wages hurt? Someone pays. Who are the net
losers, and by how much?

2. How much do they increase the earnings of lower-wage
(<$20 per hour) workers and for how long?

3. Do employers reduce employer benefits or the quality of
working conditions when minimums are increased?

5. Do they attract more qualified/more productive workers
into the low-wage labor pool, permitting employers to be more selective and, if
so, who gets displaced?

One thing that we know for certain is that the effects of
moderate minimum-wage boosts on total low-wage employment, when and where the
economy is healthy, are trivially small, maybe non-existent. What happens in
the macro-economy, boom or bust, swamps the direct effects of minimum-wage
increases. Consequently, Chuck’s claim that “a substantial minimum wage
increase can go hand-in-hand with solid economic growth” is undoubtedly true.

Moreover, even the direct employment effects that we have
observed from minimum-wage hikes are vanishingly small. Statutory wage minimums
work like taxes on low-wage labor, with their proceeds paid directly to
low-wage workers and most of their costs shifted forward to consumers in the
form of higher prices. This might have two kind of effects on the demand for low-wage
labor: an income effect, since consumers wouldn’t be able to afford to buy as
many goods and services as before (more or less fully offset in the aggregate
by the wage increases), and a substitution effect, as consumers shift away from
goods and services whose relative prices have increased as a result.

Consequently, moderate increases in the minimum wage should
raises the price of some things, e.g., services produced by the hospitality
industry, although, in the case of a 30% increase in the minimum wage, probably
by less than 3%, and also perhaps cause folks to substitute away from sit-down
restaurants, and toward fast-food restaurants. Nevertheless, so far as the
food preparation and service industry is concerned, about 80,000 workers,
it would be really surprising if the net, one-time reduction in jobs caused by
Oregon’s current minimum wage were 1,000, statewide, This is the case primarily
because labor costs represent less than 40% of the total cost of sit-down hospitality
services and 25% of take-out food service. Moreover, while Oregon’s minimum
wage is 27 percent above the national rate, its median wage for food preparation and service occupations is only
5.5 percent higher ($9.60 compared to $9.10 nationwide in 2014). More broadly,
the scale of this effect is undoubtedly far higher for food preparation and
service occupations than in most other Oregon industries that hire large
numbers of minimum wage workers, e.g., retail, where the low-wage, labor-added
component is typically ≥ 10%.

There is one industry, however, where one might see an effect,
if one is to be found: child-care.
The minimum wage is the median hourly wage in the child-care industry in most
states. Moreover, wages and salaries account for more than 60% of the cost of
service in this industry. Not surprisingly, Oregon, with one of the nation’s
highest minimum wages, also has the highest child-care cost in the nation.
Oregon has about 15K child-care workers. If Oregon’s current minimum wage has a
discernable effect anywhere, it should have one here.

This also points to another consideration often omitted in
these discussions: the effects of an increase in the minimum wage, both for
good and for ill, depends less on the existing minimum wage than on median wages
in low-wage occupations. Oregon’s minimum wage has raised median-wages in food
preparation and service occupations about 6% compared to the rest of the
country; in child-care, the effect is more like 25%. This is relevant to the chuck’s
claim that Oregon has previously made big jumps in our minimum wage previously
(42% in 1989 vs. a 43% proposed increase today) without harming the economy.
The last time Oregon did so, its state minimum wage was the same
as the national minimum; it is now 27% higher.

From this standpoint, an increase to $13.50, let alone $15,
would at this time be entirely unprecedented. We might end up in a very good
place, but we have no real basis for drawing such a conclusion.

Moreover, contrary to Chuck’s claim, the fact is that, over
the next couple of years following the 1989 minimum wage boost, Oregon unemployment
increased substantially (just as it did in the rest of the US). Eventually, the
economy picked up, but ever since, Oregon’s unemployment level has exceeded
that of the US, despite faster GDP growth overall. Of course, the 1990-92 recession,
not the increase in the minimum wage, caused the fall in employment. But there
is some evidence
of a possible link between Oregon’s 1989 minimum-wage hike and the
persistence of higher levels of unemployment after the recession, i.e.,
evidence that the timing of minimum wage hikes matters, not just their size.

Some might argue, therefore, that, before taking a leap into
the dark, it might be better to see how things work out in Seattle, Los
Angeles, and Chicago. But such caution mostly applies to giant leaps. A
minimum-wage boost to $13.50 is not really a giant leap: we are talking about a
>$2 billion shift in a >$150 billion economy (with the net gain to below-median-income
households of $200-$600 million).

Of course, from a welfare standpoint, it is too bad that the
attention given to boosting minimum wages isn’t focused on policies that are
better targeted at low-income families and the working poor: the preservation
and expansion of the social safety net, especially foodstamps, aid to needy
families, and unemployment benefits. There is clear, unambiguous evidence that
these policies materially improve the welfare of low-income households. Moreover,
states that pursue these policies have lower rates of infant mortality, less crime,
higher earnings, and better education outcomes. There is even some evidence
that these policies are associated with greater social mobility, which is evidently
not the case for minimum wage policies.

It’s also too bad that those who are primarily concerned
with the working poor don’t concentrate on the expansion of Oregon’s earned
income-tax credits (EITC) or on increasing
participation of Oregonians in the federal EITC. Unlike minimum wages, these
programs target their benefits exclusively to the working poor and are
implicitly financed by personal income taxes, which are progressive at both the
federal and state level, rather than consumption, which is not. Indeed, the
net-gain to low-income Oregonians from boosting participation in EITC to 100%
(i.e., if all of those eligible to participate did so) might be as much as half
the gain to low-income households from the proposed minimum-wage boost.

Because the most important reason for under-participation in
the EITC is the failure to file a tax return, which, as a result of
withholding, leads to over collections from low-income taxpayers of up to $200
million per year in Oregon and probably a comparable amount in federal income
taxes, we could be talking about net gains to low-income households from fixing
EITC participation that are actually larger than those of a minimum-wage boost.

The policies are not inherently rivals (indeed, a good case
can be made that they are complements). We could do both; but we probably
won’t. In this case the not-so-bad looks like the enemy of the pretty-good. I’m
not against increasing the minimum wage, but we could do better.

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